10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                      to

Commission File Number: 001-35435

Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	41-1939628
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5540 Pioneer Creek Drive
Maple Plain, Minnesota	55359
(Address of principal executive offices)	(Zip Code)

(763) 479-3680

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share	PRLB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☑Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☑Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,759,436 shares of Common Stock, par value $0.001 per share, were outstanding at October 24, 2019.

Proto Labs, Inc.

TABLE OF CONTENTS

Item	Description	Page
PART I
1.	Financial Statements	1
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
3.	Quantitative and Qualitative Disclosures about Market Risk	28
4.	Controls and Procedures	29
PART II
1.	Legal Proceedings	30
1A.	Risk Factors	30
2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
3.	Defaults Upon Senior Securities	30
4.	Mine Safety Disclosures	30
5.	Other Information	30
6.	Exhibits	31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2019			2018
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	121,568		$	85,046
Short-term marketable securities		23,642			46,750
Accounts receivable, net of allowance for doubtful accounts of $1,001 and $919 as of September 30, 2019 and December 31, 2018, respectively		64,069			59,155
Inventory		9,448			10,087
Prepaid expenses and other current assets		8,038			8,567
Income taxes receivable		2,852			5,757
Total current assets		229,617			215,362
Property and equipment, net		252,579			228,001
Goodwill		128,752			128,752
Other intangible assets, net		18,258			19,850
Long-term marketable securities		9,783			23,579
Operating lease assets		12,008			-
Other long-term assets		3,902			3,441
Total assets	$	654,899		$	618,985
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	18,668		$	17,411
Accrued compensation		12,926			18,130
Accrued liabilities and other		13,133			16,702
Current operating lease liabilities		3,364			-
Income taxes payable		6,717			491
Total current liabilities		54,808			52,734
Long-term operating lease liabilities		9,006			-
Long-term deferred tax liabilities		21,750			20,162
Other long-term liabilities		5,238			4,592
Total liabilities		90,802			77,488
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2019 and December 31, 2018		-			-
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,759,109 and 26,984,747 shares as of September 30, 2019 and December 31, 2018, respectively		27			27
Additional paid-in capital		265,178			258,502
Retained earnings		309,536			291,460
Accumulated other comprehensive loss		(10,644	)		(8,492	)
Total shareholders' equity		564,097			541,497
Total liabilities and shareholders' equity	$	654,899		$	618,985

The accompanying notes are an integral part of these consolidated financial statements.

1

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Statements of Operations:
Revenue	$	117,455	$	115,430	$	346,839	$	332,827
Cost of revenue		57,839		53,027		168,127		153,303
Gross profit		59,616		62,403		178,712		179,524
Operating expenses
Marketing and sales		17,604		16,818		55,466		50,947
Research and development		8,359		7,458		24,541		21,155
General and administrative		12,380		13,096		38,411		38,679
Total operating expenses		38,343		37,372		118,418		110,781
Income from operations		21,273		25,031		60,294		68,743
Other income, net		228		390		1,566		1,376
Income before income taxes		21,501		25,421		61,860		70,119
Provision for income taxes		4,709		4,484		13,391		12,817
Net income	$	16,792	$	20,937	$	48,469	$	57,302
Net income per share:
Basic	$	0.63	$	0.77	$	1.80	$	2.13
Diluted	$	0.62	$	0.77	$	1.79	$	2.10
Shares used to compute net income per share:
Basic		26,846,030		27,038,585		26,894,420		26,963,205
Diluted		27,005,341		27,337,886		27,072,873		27,268,311
Comprehensive Income (net of tax)
Comprehensive income	$	14,642	$	20,058	$	46,317	$	55,298

The accompanying notes are an integral part of these consolidated financial statements.

2

Proto Labs, Inc.

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

	Common Stock					Additional						Accumulated Other
						Paid-In			Retained			Comprehensive
	Shares			Amount		Capital			Earnings			Loss			Total
Balance at January 1, 2019		26,984,747			27		258,502			291,460			(8,492	)		541,497
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		19,950			-		(420	)		-			-			(420	)
Stock-based compensation expense		-			-		3,040			-			-			3,040
Repurchases of common stock		(157,716	)		-		(1,511	)		(15,798	)		-			(17,309	)
Net income		-			-		-			15,511			-			15,511
Other comprehensive income
Foreign currency translation adjustment		-			-		-			-			476			476
Comprehensive income																15,987
Balance at March 31, 2019		26,846,981		$	27	$	259,611		$	291,173		$	(8,016	)	$	542,795
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		75,785			-		245			-			-			245
Stock-based compensation expense		-			-		3,486			-			-			3,486
Repurchases of common stock		(40,669	)		-		(390	)		(3,711	)		-			(4,101	)
Net income		-			-		-			16,166			-			16,166
Other comprehensive income
Foreign currency translation adjustment		-			-		-			-			(478	)		(478	)
Comprehensive income																15,688
Balance at June 30, 2019		26,882,097		$	27	$	262,952		$	303,628		$	(8,494	)	$	558,113
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		5,089			-		241			-			-			241
Stock-based compensation expense		-			-		3,212			-			-			3,212
Repurchases of common stock		(128,077	)		-		(1,227	)		(10,884	)		-			(12,111	)
Net income		-			-		-			16,792			-			16,792
Other comprehensive income
Foreign currency translation adjustment		-			-		-			-			(2,150	)		(2,150	)
Comprehensive income																14,642
Balance at September 30, 2019		26,759,109		$	27	$	265,178		$	309,536		$	(10,644	)	$	564,097

	Common Stock				Additional				Accumulated Other
					Paid-In		Retained		Comprehensive
	Shares		Amount		Capital		Earnings		Loss			Total
Balance at January 1, 2018		26,828,651		27		241,725		224,697		(5,234	)		461,215
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		102,895		-		2,250		-		-			2,250
Stock-based compensation expense		-		-		2,307		-		-			2,307
Repurchases of common stock		-		-		-		-		-			-
Revenue recognition transition adjustment		-		-		-		1,460		-			1,460
Net income		-		-		-		18,051		-			18,051
Other comprehensive income
Foreign currency translation adjustment		-		-		-		-		2,393			2,393
Comprehensive income													20,444
Balance at March 31, 2018		26,931,546	$	27	$	246,282	$	244,208	$	(2,841	)	$	487,676
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		94,848		-		1,054		-		-			1,054
Stock-based compensation expense		-		-		2,727		-		-			2,727
Repurchases of common stock		-		-		-		-		-			-
Net income		-		-		-		18,314		-			18,314
Other comprehensive income
Foreign currency translation adjustment		-		-		-		-		(3,518	)		(3,518	)
Comprehensive income													14,796
Balance at June 30, 2018		27,026,394	$	27	$	250,063	$	262,522	$	(6,359	)	$	506,253
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		41,674		-		1,942		-		-			1,942
Stock-based compensation expense		-		-		2,953		-		-			2,953
Repurchases of common stock		-		-		-		-		-			-
Net income		-		-		-		20,937		-			20,937
Other comprehensive income
Foreign currency translation adjustment		-		-		-		-		(879	)		(879	)
Comprehensive income													20,058
Balance at September 30, 2018		27,068,068	$	27	$	254,958	$	283,459	$	(7,238	)	$	531,206

The accompanying notes are an integral part of these consolidated financial statements.

3

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2019			2018
Operating activities
Net income	$	48,469		$	57,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,658			19,520
Stock-based compensation expense		9,738			7,986
Deferred taxes		1,599			1,770
Gain on sale of businesses		-			(671	)
Amortization of held-to-maturity securities		(5	)		336
Other		(133	)		160
Changes in operating assets and liabilities:
Accounts receivable		(5,387	)		(8,993	)
Inventories		551			324
Prepaid expenses and other		(162	)		(2,058	)
Income taxes		9,165			2,278
Accounts payable		1,479			980
Accrued liabilities and other		(4,193	)		6,028
Net cash provided by operating activities		83,779			84,962
Investing activities
Purchases of property, equipment and other capital assets		(46,151	)		(61,898	)
Cash used for acquisitions, net of cash acquired		-			(90	)
Proceeds from sale of business		-			284
Purchases of other assets and investments		(4,000	)		(126	)
Purchases of marketable securities		(17,443	)		(41,384	)
Proceeds from maturities of marketable securities		54,352			44,721
Net cash used in investing activities		(13,242	)		(58,493	)
Financing activities
Payments on debt		-			(5,000	)
Proceeds from exercises of stock options		2,486			7,269
Purchases of shares withheld for tax obligations		(2,420	)		(2,021	)
Repurchases of common stock		(33,521	)		-
Net cash (used in) provided by financing activities		(33,455	)		248
Effect of exchange rate changes on cash and cash equivalents		(560	)		(831	)
Net increase in cash and cash equivalents		36,522			25,886
Cash and cash equivalents, beginning of period		85,046			36,707
Cash and cash equivalents, end of period	$	121,568		$	62,593

The accompanying notes are an integral part of these consolidated financial statements.

4

Note 1 – Basis of Presentation

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended  December 31, 2018 as filed with the Securities and Exchange Commission (SEC) on February 22, 2019.

The accompanying Consolidated Balance Sheet as of December 31, 2018 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K filed on February 22, 2019 as referenced above.

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During the first quarter of 2019, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $13.1 million.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the impact to be material.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material.  

5

Note 3 – Net Income per Common Share

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

The table below sets forth the computation of basic and diluted net income per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2019		2018		2019		2018
Net income	$	16,792	$	20,937	$	48,469	$	57,302
Basic - weighted-average shares outstanding:		26,846,030		27,038,585		26,894,420		26,963,205
Effect of dilutive securities:
Employee stock options and other		159,311		299,301		178,453		305,106
Diluted - weighted-average shares outstanding:		27,005,341		27,337,886		27,072,873		27,268,311
Net income per share:
Basic	$	0.63	$	0.77	$	1.80	$	2.13
Diluted	$	0.62	$	0.77	$	1.79	$	2.10

6

Note 4 – Goodwill and Other Intangible Assets

There were no changes in the carrying amount of Goodwill during the three and nine months ended September 30, 2019.

Intangible assets other than goodwill at  September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019							December 31, 2018							Useful	Weighted Average
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)	Useful Life Remaining (in years)
Intangible assets with finite lives:
Marketing assets	$	930	$	(504	)	$	426	$	930	$	(434	)	$	496	10.0	4.6
Non-compete agreement		270		(218	)		52		270		(206	)		64	2.0 - 5.0	3.3
Trade secrets		250		(250	)		-		250		(233	)		17	5.0	0.0
Trade names		1,080		(945	)		135		1,080		(540	)		540	2.0	0.3
Software technology		13,229		(1,933	)		11,296		12,229		(997	)		11,232	10.0	8.3
Customer relationships		10,070		(3,721	)		6,349		10,070		(2,569	)		7,501	6.0 - 9.0	4.1
Total intangible assets	$	25,829	$	(7,571	)	$	18,258	$	24,829	$	(4,979	)	$	19,850

Amortization expense for intangible assets was $0.9 million and $0.8 million for the three months ended  September 30, 2019 and 2018, respectively, and $2.6 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:

(in thousands)	Estimated Amortization Expense
Remaining 2019	$	889
2020		3,016
2021		3,016
2022		3,016
2023		2,813
Thereafter		5,508
Total estimated amortization expense	$	18,258

7

Note 5 – Fair Value Measurements

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs.

The following table summarizes financial assets as of September 30, 2019 and December 31, 2018 measured at fair value on a recurring basis: 

	September 30, 2019						December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	58,563	$	-	$	-	$	8,943	$	-	$	-
Total	$	58,563	$	-	$	-	$	8,943	$	-	$	-

Note 6 – Marketable Securities

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of September 30, 2019 and December 31, 2018:

	September 30, 2019
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	5,612	$	11	$	(3	)	$	5,620
Corporate debt securities		16,503		100		(1	)		16,602
U.S. government agency securities		8,340		1		(10	)		8,331
Certificates of deposit/time deposits		1,479		22		(1	)		1,500
Commercial paper		1,491		-		(1	)		1,490
Total marketable securities	$	33,425	$	134	$	(16	)	$	33,543

8

	December 31, 2018
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	17,509	$	1	$	(33	)	$	17,477
Corporate debt securities		31,769		-		(96	)		31,673
U.S. government agency securities		16,843		-		(88	)		16,755
Certificates of deposit/time deposits		4,208		-		(25	)		4,183
Total marketable securities	$	70,329	$	1	$	(242	)	$	70,088

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. In reaching this conclusion, the Company considered the credit quality of the issuers of the debt securities as well as the Company’s intent to hold the investments to maturity and recover the full principal.

Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.

The September 30, 2019 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

	September 30,
(in thousands)	2019
Due in one year or less	$	23,642
Due after one year through five years		9,783
Total marketable securities	$	33,425

Note 7 – Inventory

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

The Company’s inventory consisted of the following as of the dates indicated:

	September 30,			December 31,
(in thousands)	2019			2018
Raw materials	$	9,328		$	9,560
Work in process		304			792
Total inventory		9,632			10,352
Allowance for obsolescence		(184	)		(265	)
Inventory, net of allowance	$	9,448		$	10,087

9

Note 8 – Leases

The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to the Company’s accounting policies as a result of adopting ASC 842 are discussed below.

The Company accounts for leases in accordance with ASC 842. The Company adopted the standard as of  January 1, 2019, using the alternative transition method provided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date (the "effective date method"). Under the effective date method, comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments to reflect the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. The Company did not elect the hindsight practical expedient. The Company recorded a net increase of $13.1 million to its operating lease assets and liabilities on January 1, 2019. The adoption did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 did not have a material impact on the Company's consolidated statements of comprehensive income, shareholders' equity or cash flows as of the adoption date.

The Company has operating leases for office space, manufacturing facilities and certain company vehicles and equipment. The leases have remaining lease terms of one year to 10 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of September 30, 2019, the operating lease liability does not include any options to extend or terminate leases. The Company currently has no finance leases.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate of return, therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease agreements that contain non-lease components, with the exception of certain real estate leases, are accounted for as a single lease component.

Supplemental balance sheet information related to leases was as follows:

(in thousands)	September 30, 2019
Operating lease assets	$	12,008
Current operating lease liabilities	$	3,364
Long-term operating lease liabilities		9,006
Total operating lease liabilities	$	12,370

Lease expense is recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred. The components of lease expense for the periods reported were as follows:

(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	967	$	2,984
Variable lease cost		306		811
Total lease cost	$	1,273	$	3,795

10

Maturities of operating lease liabilities as of September 30, 2019 (in accordance with ASC 842) were as follows:

(in thousands)	Operating Leases
Year Ending December 31,
2019 (excluding nine months ended September 30, 2019)	$	1,216
2020		3,514
2021		2,770
2022		2,580
2023		1,041
After 2023		2,050
Total future minimum lease payments		13,171
Less interest		(801	)
Present value of lease liabilities	$	12,370

As of September 30, 2019, we have no operating leases that have not yet commenced.

Weighted average remaining lease term and discount rate was as follows: 

	September 30, 2019
Weighted Average Remaining Lease Term (Years)		4.8
Weighted Average Discount Rate		2.6	%

Supplemental cash flow information related to leases was as follows:

(in thousands)	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows for operating leases	$	3,878
Lease assets obtained in exchange for new operating lease liabilities		1,837

11

Note 9 – Stock-Based Compensation

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

Employee Stock Purchase Plan

The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period.

Stock-Based Compensation Expense

Stock-based compensation expense was $3.2 million and $3.0 million for the three months ended September 30, 2019 and 2018, respectively, and $9.7 million and $8.0 million for the nine months ended September 30, 2019 and 2018, respectively.

Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2019:

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2018		252,616		$	64.71
Granted		53,708			105.81
Exercised		(11,921	)		56.25
Forfeited		(10,833	)		83.74
Options outstanding at September 30, 2019		283,570		$	72.12
Exercisable at September 30, 2019		154,539		$	58.18

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period from four to five years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.

The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2019 was $47.84.

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2019 and 2018:

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.35 - 2.58%	2.52 - 3.07%
Expected life (years)	6.25	6.25
Expected volatility	42.52 - 42.74%	41.68 - 42.22%
Expected dividend yield	0%	0%

As of September 30, 2019, there was $4.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.

12

Restricted Stock

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from four to five years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date. 

The following table summarizes restricted stock activity during the nine months ended September 30, 2019:

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2018		323,921		$	79.85
Granted		114,467			106.41
Restrictions lapsed		(95,884	)		79.32
Forfeited		(20,299	)		86.54
Restricted stock at September 30, 2019		322,205		$	89.02

As of September 30, 2019, there was $24.4 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.8 years. 

13

Performance Stock

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment.

The following table summarizes performance stock activity during the nine months ended September 30, 2019:

				Weighted-
				Average
				Grant Date
	Performance			Fair Value
	Stock			Per Share
Performance stock at December 31, 2018		52,140		$	76.54
Granted		21,434			104.99
Restrictions lapsed		-			-
Performance change		(12,854	)		58.35
Forfeited		(2,375	)		105.37
Performance stock at September 30, 2019		58,345		$	89.82

As of September 30, 2019, there was $2.7 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 1.9 years. 

Employee Stock Purchase Plan

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2019 and 2018: 

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.33 - 2.35%	1.48 - 2.06%
Expected life (months)	6.00	6.00
Expected volatility	37.36 - 53.57%	24.49 - 31.50%
Expected dividend yield	0%	0%

14

 Note 10 – Accumulated Other Comprehensive Loss

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2019			2018			2019			2018
Foreign currency translation adjustments
Balance at beginning of period	$	(8,494	)	$	(6,359	)	$	(8,492	)	$	(5,234	)
Other comprehensive income (loss) before reclassifications		(2,150	)		(879	)		(2,152	)		(2,004	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		(2,150	)		(879	)		(2,152	)		(2,004	)
Balance at end of period	$	(10,644	)	$	(7,238	)	$	(10,644	)	$	(7,238	)

Note 11 – Income Taxes

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended September 30, 2019 and 2018, the Company recorded an income tax provision of $4.7 million and $4.5 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded an income tax provision of $13.4 million and $12.8 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended September 30, 2019 was 21.9 percent compared to 17.6 percent in the same period of the prior year. The effective tax rate increased by 4.3 percent for the three months ended September 30, 2019 when compared to the same period in 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018. The effective income tax rate for the nine months ended September 30, 2019 was 21.6 percent compared to 18.3 percent in the same period of the prior year. The effective tax rate increased by 3.3 percent for the nine months ended September 30, 2019 when compared to the same period in 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018.

The effective income tax rate for the nine months ended September 30, 2019 differs from the U.S. federal statutory rate of 21.0 percent due to various factors, including operating in multiple state and foreign jurisdictions and tax credits for which the Company qualifies.

The Company had unrecognized tax benefits totaling $4.4 million and $4.1 million as of September 30, 2019 and December 31, 2018, respectively, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

15

Note 12 – Segment Reporting

The Company’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does not allocate directly to its operating segments.

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. 

Beginning in 2019, the Company's CODM made a decision to view certain research and development costs by geographic region. As a result, costs previously included in the Corporate Unallocated and Japan category have been included in the respective geographic regions.  All periods presented have been restated to reflect this change.

Revenue and income from operations by reportable segment for the three and nine months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Revenue:
United States	$	92,916	$	90,732	$	271,877	$	261,253
Europe		20,721		21,273		62,915		61,431
Japan		3,818		3,425		12,047		10,143
Total revenue	$	117,455	$	115,430	$	346,839	$	332,827

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Income from Operations:
United States	$	28,109		$	30,479		$	82,367		$	88,579
Europe		4,045			5,465			12,022			12,835
Corporate Unallocated and Japan		(10,881	)		(10,913	)		(34,095	)		(32,671	)
Total Income from Operations	$	21,273		$	25,031		$	60,294		$	68,743

Total long-lived assets at September 30, 2019 and December 31, 2018 were as follows:

	September 30,		December 31,
(in thousands)	2019		2018
Total long-lived assets:
United States	$	203,771	$	185,979
Europe		40,353		34,577
Japan		8,455		7,445
Total Assets	$	252,579	$	228,001

16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018.

Forward-Looking Statements

Statements contained in this report regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K as filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Overview

We are the world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts. We manufacture prototypes and low-volume production parts for companies worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over the Internet. We target our products to the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.

Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers.

Injection Molding

Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-run production often come back to Protolabs’ Injection Molding product line for additional quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-demand manufacturing injection molding product offering. This product offering utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs, typically in annual volumes of less than 10,000 parts.

CNC Machining

Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process.

Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 1,000 parts.

17

3D Printing

Our 3D Printing product line includes stereolithography, selective laser sintering, direct metal laser sintering, Multi Jet Fusion and PolyJet processes, which offer customers a wide-variety of high-quality, precision rapid prototyping and low-volume production. These processes create parts with a high level of accuracy, detail, strength and durability. Industrial 3D Printing is best suited for functional prototypes, complex designs and end-use applications produced in small quantities, typically in the range of one to 50 parts.

Sheet Metal

Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, which provides customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the product developer or engineer to fabricate quick-turn prototype sheet metal or short-run production parts. The Sheet Metal product line is well suited to produce quantities in the range of one to 500 parts.

Key Financial Measures and Trends

Revenue

Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our historical and current efforts to increase revenue have been directed at expanding the breadth of our product offerings, gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including:

● expanding the breadth and scope of each of our product lines by adding more sizes and materials to our offerings;

● the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;

● expanding 3D Printing to Europe through our acquisition of Alphaform in October 2015;

● the introduction of our Sheet Metal product line through our acquisition of RAPID in 2017; and

● continuously improving the usability of our product lines such as our web-centric applications.

During the three months ended September 30, 2019, we served 21,471 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 3.3% over the same period in 2018. During the nine months ended September 30, 2019, we served 40,791 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 5.1% over the same period in 2018.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.

We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our mix of revenue by product line and geography, pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, and foreign exchange rates.

18

Operating Expenses

Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs are the most significant component in each of these categories.

Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and sheet metal custom parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.

Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade shows and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base and grow revenue.

Research and development. Research and development expense consists primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. Costs for internal use software are evaluated by project and capitalized where appropriate under ASC 350-40, Intangibles — Goodwill and Other, Internal-Use Software. We expect research and development expense to increase in the future as we seek to enhance our e-commerce interface technology, internal software and supporting business systems.

General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.

Other Income, net

Other income, net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates.

Provision for Income Taxes

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases.

19

Results of Operations

The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods. 

	Three Months Ended September 30,								Change						Nine Months Ended September 30,								Change
(dollars in thousands)	2019				2018				$			%			2019				2018				$			%
Revenue	$	117,455	100.0		$	115,430	100.0		$	2,025			1.8		$	346,839	100.0		$	332,827	100.0		$	14,012			4.2
Cost of revenue		57,839	49.2			53,027	45.9			4,812			9.1			168,127	48.5			153,303	46.1			14,824			9.7
Gross profit		59,616	50.8			62,403	54.1			(2,787	)		(4.5	)		178,712	51.5			179,524	53.9			(812	)		(0.5	)
Operating expenses:
Marketing and sales		17,604	15.0			16,818	14.6			786			4.7			55,466	16.0			50,947	15.3			4,519			8.9
Research and development		8,359	7.1			7,458	6.5			901			12.1			24,541	7.1			21,155	6.4			3,386			16.0
General and administrative		12,380	10.5			13,096	11.3			(716	)		(5.5	)		38,411	11.0			38,679	11.6			(268	)		(0.7	)
Total operating expenses		38,343	32.6			37,372	32.4			971			2.6			118,418	34.1			110,781	33.3			7,637			6.9
Income from operations		21,273	18.2			25,031	21.7			(3,758	)		(15.0	)		60,294	17.4			68,743	20.6			(8,449	)		(12.3	)
Other income, net		228	0.1			390	0.3			(162	)		(41.5	)		1,566	0.4			1,376	0.4			190			13.8
Income before income taxes		21,501	18.3			25,421	22.0			(3,920	)		(15.4	)		61,860	17.8			70,119	21.0			(8,259	)		(11.8	)
Provision for income taxes		4,709	4.0			4,484	3.9			225			5.0			13,391	3.8			12,817	3.8			574			4.5
Net income	$	16,792	14.3	%	$	20,937	18.1	%	$	(4,145	)		(19.8	)%	$	48,469	14.0	%	$	57,302	17.2	%	$	(8,833	)		(15.4	)%

Stock-based compensation expense included in the statements of operations data above for the three and nine months ended September 30, 2019 and 2018 was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019		2018
Stock options and restricted stock	$	2,886	$	2,728	$	8,858	$	7,415
Employee stock purchase plan		326		225		880		571
Total stock-based compensation expense	$	3,212	$	2,953	$	9,738	$	7,986
Cost of revenue	$	560	$	446	$	1,466	$	1,096
Operating expenses:
Marketing and sales		760		560		1,923		1,380
Research and development		560		419		1,486		1,109
General and administrative		1,332		1,528		4,863		4,401
Total stock-based compensation expense	$	3,212	$	2,953	$	9,738	$	7,986

20

Comparison of Three Months Ended September 30, 2019 and 2018

Revenue

Revenue by reportable segment and the related changes for the three months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,
	2019					2018					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$			%
Revenue
United States	$	92,916		79.1	%	$	90,732		78.6	%	$	2,184			2.4	%
Europe		20,721		17.6			21,273		18.4			(552	)		(2.6	)
Japan		3,818		3.3			3,425		3.0			393			11.5
Total revenue	$	117,455		100.0	%	$	115,430		100.0	%	$	2,025			1.8	%

Our revenue increased $2.0 million, or 1.8%, for the three months ended September 30, 2019 compared to the same period in 2018. By reportable segment, revenue in the United States increased $2.2 million, or 2.4%, for the three months ended September 30, 2019 compared to the same period in 2018. Revenue in Europe decreased $0.6 million, or 2.6%, and revenue in Japan increased $0.4 million, or 11.5%, in each case for the three months ended September 30, 2019 compared to the same period in 2018.

Our revenue growth during the three months ended September 30, 2019 was the result of an increase in the volume of product developers and engineers we served. During the three months ended September 30, 2019, we served 21,471 unique product developers and engineers, an increase of 3.3% over the same period in 2018. Our growth in product developers and engineers served increased at a greater rate than our revenue growth, resulting in a decrease in the average spend per product developer and engineer. The decrease in average spend per product developer and engineer was driven by a change in the mix of products with a lower average order size purchased during the quarter by the product developers and engineers we serve.

Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $0.9 million during the three months ended September 30, 2019 compared to the same period in 2018 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the three months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,
	2019					2018					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$			%
Revenue
Injection Molding	$	55,167		47.0	%	$	53,681		46.5	%	$	1,486			2.8	%
CNC Machining		40,219		34.2			40,845		35.4			(626	)		(1.5	)
3D Printing		15,898		13.5			13,845		12.0			2,053			14.8
Sheet Metal		5,280		4.5			6,452		5.6			(1,172	)		(18.2	)
Other Revenue		891		0.8			607		0.5			284			46.8
Total revenue	$	117,455		100.0	%	$	115,430		100.0	%	$	2,025			1.8	%

By product line, our revenue growth was driven by a 2.8% increase in Injection Molding revenue, a 14.8% increase in 3D Printing revenue and a 46.8% increase in Other Revenue, which was partially offset by a 1.5% decrease in CNC Machining revenue driven by foreign currency exchange rates and a decline in our acquired CNC services and an 18.2% decrease in Sheet Metal revenue, in each case for the three months ended September 30, 2019 compared to the same period in 2018. The decrease in Sheet Metal revenue was driven by a decision to move away from some complex business which was not scalable and did not fit into the envelope of our revised Sheet Metal product offerings.

21

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $4.8 million, or 9.1%, for the three months ended September 30, 2019 compared to the same period in 2018, which was greater than the rate of revenue increase of 1.8% for the three months ended September 30, 2019 compared to the same period in 2018. The increase in cost of revenue resulted from the growth of the business and investments to support future growth. Specifically, the increases were driven by raw material and production cost increases of $1.4 million, an increase in direct labor headcount resulting in personnel and related cost increases of $1.6 million and equipment and facility-related cost increases of $1.8 million to support increased sales volumes and future growth of the business.

Gross Profit and Gross Margin. Gross profit decreased from $62.4 million in the three months ended September 30, 2018 to $59.6 million in the three months ended September 30, 2019 primarily due to an increase in expenses associated with the cost of revenue. Gross margin decreased from 54.1% in the three months ended September 30, 2018 to 50.8% in the three months ended September 30, 2019 due to the timing and mix of revenue, with the RAPID acquisition being the primary driver of the mix related impact, and increased repair and maintenance and higher production supply spend in our CNC Machining and Injection Molding operations in the United States.

Operating Expenses, Other Income, net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expenses increased $0.8 million, or 4.7%, during the three months ended September 30, 2019 compared to the same period in 2018 due primarily to an increase in headcount resulting in personnel and related cost increases of $0.6 million as well as marketing program cost increases of $0.2 million.

Research and Development. Our research and development expenses increased $0.9 million, or 12.1%, during the three months ended September 30, 2019 compared to the same period in 2018 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million and an increase in administrative and depreciation expenses of $0.2 million.

General and Administrative. Our general and administrative expenses decreased $0.7 million, or 5.5%, during the three months ended September 30, 2019 compared to the same period in 2018 due to stock-based compensation cost decreases of $0.2 million related to a reduction in the value of performance shares, personnel and related cost decreases of $0.3 million primarily driven by a reduction in incentive compensation, as well as a $0.3 million decrease in amortization cost driven by allocations to other expense categories to appropriately reflect the nature of our intangible assets, which were partially offset by professional and administrative cost increases of $0.1 million.

Other Income, net. We recognized other income, net of $0.2 million for the three months ended September 30, 2019, a decrease of $0.2 million compared to other income, net of $0.4 million for the three months ended September 30, 2018. Other income, net for the three months ended September 30, 2019 primarily consisted of $0.5 million in interest income on investments, which was partially offset by a $0.3 million loss on foreign currency. Other income, net for the three months ended September 30, 2018 primarily consisted of $0.5 million in interest income on investments and a $0.1 million gain on foreign currency, which was partially offset by a $0.2 million loss on the sale of an asset.

Provision for Income Taxes. Our effective tax rate of 21.9% for the three months ended September 30, 2019 increased 4.3% compared to 17.6% for the same period in 2018. The increase in the effective tax rate is primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018. Our income tax provision of $4.7 million for the three months ended September 30, 2019 increased $0.2 million compared to our income tax provision of $4.5 million for the three months ended September 30, 2018.

22

Comparison of Nine Months Ended September 30, 2019 and 2018

Revenue

Revenue by reportable segment and the related changes for the nine months ended September 30, 2019 and 2018 were as follows:

	Nine Months Ended September 30,
	2019					2018					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$		%
Revenue
United States	$	271,877		78.4	%	$	261,253		78.5	%	$	10,624		4.1	%
Europe		62,915		18.1			61,431		18.5			1,484		2.4
Japan		12,047		3.5			10,143		3.0			1,904		18.8
Total revenue	$	346,839		100.0	%	$	332,827		100.0	%	$	14,012		4.2	%

Our revenue increased $14.0 million, or 4.2%, for the nine months ended September 30, 2019 compared to the same period in 2018. By reportable segment, revenue in the United States increased $10.6 million, or 4.1%, for the nine months ended September 30, 2019 compared to the same period in 2018. Revenue in Europe increased $1.5 million, or 2.4%, and revenue in Japan increased $1.9 million, or 18.8%, in each case for the nine months ended September 30, 2019 compared to the same period in 2018.

Our revenue growth during the nine months ended September 30, 2019 was the result of an increase in the volume of product developers and engineers we served. During the nine months ended September 30, 2019, we served 40,791 unique product developers and engineers, an increase of 5.1% over the same period in 2018. Our growth in product developers and engineers served increased at a greater rate than our revenue growth, resulting in a decrease in the average spend per product developer and engineer. The decrease in average spend per product developer and engineer was driven by a change in the mix of products with a lower average order size purchased during the year by the product developers and engineers we serve.

Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $3.9 million during the nine months ended September 30, 2019 compared to the same period in 2018 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the nine months ended September 30, 2019 and 2018 were as follows:

	Nine Months Ended September 30,
	2019					2018					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$			%
Revenue
Injection Molding	$	165,935		47.8	%	$	156,610		47.1	%	$	9,325			6.0	%
CNC Machining		116,979		33.7			115,364		34.7			1,615			1.4
3D Printing		45,644		13.2			39,418		11.8			6,226			15.8
Sheet Metal		15,777		4.5			19,002		5.7			(3,225	)		(17.0	)
Other Revenue		2,504		0.8			2,433		0.7			71			2.9
Total revenue	$	346,839		100.0	%	$	332,827		100.0	%	$	14,012			4.2	%

By product line, our revenue growth was driven by a 6.0% increase in Injection Molding revenue, a 1.4% increase in CNC Machining revenue, a 15.8% increase in 3D Printing revenue, and a 2.9% increase in Other Revenue, which was partially offset by a 17.0% decrease in Sheet Metal revenue, in each case for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease in Sheet Metal revenue was driven by a decision to move away from some complex business which was not scalable and did not fit into the envelope of our revised Sheet Metal product offerings.

23

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $14.8 million, or 9.7%, for the nine months ended September 30, 2019 compared to the same period in 2018, which was greater than the rate of revenue increase of 4.2% for the nine months ended September 30, 2019 compared to the same period in 2018. The increase in cost of revenue resulted from the growth of the business and investments to support future growth. Specifically, the increases were driven by raw material and production cost increases of $2.4 million, an increase in direct labor headcount resulting in personnel and related cost increases of $7.7 million and equipment and facility-related cost increases of $4.7 million to support increased sales volumes and future growth of the business.

Gross Profit and Gross Margin. Gross profit decreased from $179.5 million in the nine months ended September 30, 2018 to $178.7 million in the nine months ended September 30, 2019 primarily due to an increase in expenses associated with the cost of revenue. Gross margin decreased from 53.9% in the nine months ended September 30, 2018 to 51.5% in the nine months ended September 30, 2019 due to investments in facilities and personnel to support future growth and the timing and mix of revenue, with the RAPID acquisition being the primary driver of the mix related impact.

Operating Expenses, Other Income, net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expenses increased $4.5 million, or 8.9%, during the nine months ended September 30, 2019 compared to the same period in 2018 due primarily to an increase in headcount resulting in personnel and related cost increases of $3.5 million as well as marketing program cost increases of $1.0 million.

Research and Development. Our research and development expenses increased $3.4 million, or 16.0%, during the nine months ended September 30, 2019 compared to the same period in 2018 due to an increase in headcount resulting in personnel and related cost increases of $2.7 million, as well as an increase in administrative and depreciation expenses of $0.7 million.

General and Administrative. Our general and administrative expenses decreased $0.3 million, or 0.7%, during the nine months ended September 30, 2019 compared to the same period in 2018 due to personnel and related cost decreases of $0.4 million primarily driven by lower incentive compensation, decreases in professional services costs of $0.3 million and a decrease in amortization cost of $0.7 million driven by allocations to other expense categories to appropriately reflect the nature of our intangible assets, which were partially offset by stock-based compensation cost increases of $0.4 million and administrative cost increases of $0.7 million.  

Other Income, net. We recognized other income, net of $1.6 million for the nine months ended September 30, 2019, a $0.2 million increase compared to other income, net of $1.4 million for the nine months ended September 30, 2018. Other income, net for the nine months ended September 30, 2019 primarily consisted of $1.5 million in interest income on investments. Other income, net for the nine months ended September 30, 2018 primarily consisted of $1.1 million in interest income on investments and a $0.7 million gain on our sale of RAPID Wire & Cable, LLC, which was partially offset by a $0.2 million loss on foreign currency and a $0.2 million loss on the sale of an asset.

Provision for Income Taxes. Our effective tax rate of 21.6% for the nine months ended September 30, 2019 increased 3.3% compared to 18.3% for the same period in 2018. The increase in the effective tax rate is primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018. Our income tax provision increased by $0.6 million to $13.4 million for the nine months ended September 30, 2019 compared to our income tax provision of $12.8 million for the nine months ended September 30, 2018.

24

Liquidity and Capital Resources

Cash Flows

The following table summarizes our cash flows during the nine months ended September 30, 2019 and 2018:

	Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Net cash provided by operating activities	$	83,779		$	84,962
Net cash used in investing activities		(13,242	)		(58,493	)
Net cash (used in) provided by financing activities		(33,455	)		248
Effect of exchange rates on cash and cash equivalents		(560	)		(831	)
Net increase in cash and cash equivalents	$	36,522		$	25,886

25

Sources of Liquidity

Historically, we have primarily financed our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $121.6 million as of September 30, 2019, an increase of $36.5 million from December 31, 2018. The increase in our cash was primarily due to cash generated through operations and proceeds from maturities of marketable securities, which were partially offset by investing activity and repurchases of common stock.

Cash Flows from Operating Activities

Cash flows from operating activities were $83.8 million during the nine months ended September 30, 2019 and primarily consisted of net income of $48.5 million, adjusted for certain non-cash items, including depreciation and amortization of $22.7 million, stock-based compensation expense of $9.7 million, deferred taxes of $1.6 million and changes in operating assets and liabilities and other items totaling $1.3 million. Cash flows from operating activities were $85.0 million during the nine months ended September 30, 2018 and primarily consisted of net income of $57.3 million, adjusted for certain non-cash items, including depreciation and amortization of $19.5 million, stock-based compensation expense of $8.0 million, deferred taxes of $1.8 million, amortization of held-to-maturity securities of $0.3 million and gain on sale of business of $0.7 million.

Cash flows from operating activities decreased $1.2 million during the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to decreases in net income of $8.8 million and deferred taxes of $0.2 million, which was partially offset by increases in depreciation and amortization of $3.1 million driven by an increase in capital investments and an increase in stock-based compensation expense of $1.8 million and changes in operating assets and liabilities of $2.9 million driven by timing of cash receipts and payments.

Cash Flows from Investing Activities

Cash used in investing activities was $13.2 million during the nine months ended September 30, 2019, consisting $46.2 million for the purchases of property, equipment and other capital assets, $17.4 million for purchases of marketable securities and $4.0 million for purchases of other assets and investments, which were partially offset by $54.4 million in proceeds from maturities of marketable securities.

Cash used in investing activities was $58.5 million during the nine months ended September 30, 2018, consisting of $61.9 million for the purchases of property, equipment and other capital assets, $41.4 million for the purchases of marketable securities and $0.1 million in cash used for acquisitions, which were partially offset by $44.7 million in proceeds from maturities of marketable securities and $0.2 million in proceeds from the sale of businesses.

26

Cash Flows from Financing Activities

Cash used in financing activities was $33.4 million during the nine months ended September 30, 2019, consisting of $33.5 million in repurchases of common stock and $2.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which were partially offset by $2.5 million in proceeds from the exercise of stock options.

Cash provided by financing activities was $0.3 million during the nine months ended September 30, 2018, consisting of proceeds from the exercise of stock options of $7.3 million, which were partially offset by payments on debt of $5.0 million and $2.0 million in purchases of shares withheld for tax obligations associated with equity transactions.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Critical Accounting Policies and Use of Estimates

We have adopted various accounting policies to prepare the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. See Note 8 to the Consolidated Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q for significant changes to the Company’s accounting policies as a result of adopting ASC 842.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.

27

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incur production costs and operating expenses in British Pounds, Euros and Japanese Yen.

Our operating results and cash flows are adversely impacted when the United States Dollar appreciates relative to foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign currency exchange rates.

We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be assessed by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency losses of $0.3 million and $0.2 million during the three and nine months ended September 30, 2019, respectively. We recognized foreign currency gains of $0.1 million in the three months ended September 30, 2018 and foreign currency losses of $0.2 million in the nine months ended September 30, 2018, respectively. The changes in foreign exchange rates had a negative impact on consolidated revenue of $0.9 million for the three months ended September 30, 2019 and $3.9 million for the nine months ended September 30, 2019.

28

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures are effective and provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of these financial statements, we do not believe we are party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. 

Item 1A. Risk Factors

Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The timing of the UK’s exit from the EU remains uncertain; the EU has extended the deadline for the UK to exit the EU until October 31, 2019 with a current proposal to extend the date further to January 31, 2020. The terms of the withdrawal are subject to ongoing negotiation that has created significant uncertainty about the future relationship between the UK and the EU. It is possible that the level of economic activity in this region will be adversely impacted and that there will be increased regulatory and legal complexities, including those relating to tax, trade, security and employees. In addition, Brexit could lead to economic uncertainty, including significant volatility in global stock markets and currency exchange rates, which may adversely impact our business. To mitigate the potential impact of Brexit on the import and export of goods to and from the UK, the Company is establishing business processes with shipping entities, including obtaining Authorized Economic Operator certification. In addition, the Company is increasing inventory in the UK and EU in an effort to maintain inventory required to meet customer demand in the event of disruption in shipments. Although the specific terms and the timeframe of the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 9, 2017, we announced that our board of directors had authorized the repurchase of shares of our common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million. On May 16, 2019, we announced that our board of directors approved a $50 million increase in its authorized stock repurchase program and extended the term of the program through December 31, 2023. This authorization increases the stock repurchase program to $100 million.

The timing and amount of any share repurchases will be determined by our management based on market conditions and other factors. 

The common stock repurchase does not obligate us to repurchase any dollar amount or number of shares. During the three months ended September 30, 2019, we repurchased 128,077 shares of our common stock at a total purchase price of $12.1 million under this program. Common stock repurchase activity through September 30, 2019 was as follows:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1)
July 1, 2019 through July 31, 2019		-	$	-		-	$	61,962
August 1, 2019 through August 31, 2019		128,077	$	94.53		128,077	$	49,854
September 1, 2019 through September 30, 2019		-	$	-		-	$	49,854
		128,077	$	94.53		128,077	$	49,854

(1) Effective May 15, 2019 the Board of Directors authorized the repurchase of shares of the Company’s common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $100 million. The term of the program runs through December 31, 2023.

Item 3. Defaults Upon Senior Securities

No matters to disclose.

Item 4. Mine Safety Disclosures

No matters to disclose.

Item 5. Other Information

No matters to disclose.

30

Item 6. Exhibits

The following documents are filed as part of this report:

Exhibit Number	Description of Exhibit
3.1(1)	Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.
3.2(2)	Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015
3.3(3)	Second Amended and Restated By-Laws of Proto Labs, Inc., as amended through November 8, 2016
10.1(4)	Amended and Restated Executive Employment Agreement, dated August 1, 2019, by and between Proto Labs, Inc. and Victoria M. Holt
10.2(5)	Amended and Restated Severance Agreement, dated August 1, 2019, by and between Proto Labs, Inc. and John A. Way
99.1(6)	Form of Executive Severance Agreement
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1)	Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012, and incorporated by reference herein.
(2)	Previously filed as Exhibit 3.1 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on May 21, 2015 and incorporated by reference herein.
(3)	Previously filed as Exhibit 3.1 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on November 8, 2016 and incorporated by reference herein.
(4)	Previously filed as Exhibit 10.1 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on August 2, 2019 and incorporated by reference herein.
(5)	Previously filed as Exhibit 10.2 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on August 2, 2019 and incorporated by reference herein.
(6)	Previously filed as Exhibit 99.2 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on August 2, 2019 and incorporated by reference herein.

31

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Proto Labs, Inc.
Date: October 29, 2019	/s/ Victoria M. Holt
	Victoria M. Holt
	President and Chief Executive Officer (Principal Executive Officer)

Date: October 29, 2019	/s/ John A. Way
	John A. Way
	Chief Financial Officer (Principal Financial Officer)

32

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Victoria M. Holt, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Proto Labs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 29, 2019	By:	/s/ Victoria M. Holt
		Victoria M. Holt
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002 

I, John A. Way, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Proto Labs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 29, 2019	By:	/s/ John A. Way
		John A. Way
		Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Victoria M. Holt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Proto Labs, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Proto Labs, Inc.

Date: October 29, 2019

By:	/s/ Victoria M. Holt
Name:	Victoria M. Holt
Title:	President and Chief Executive Officer

I, John A. Way, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Proto Labs, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Proto Labs, Inc.

Date: October 29, 2019

By:	/s/ John A. Way
Name:	John A. Way
Title:	Chief Financial Officer

XML

Note 6 - Marketable Securities

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Investment [Text Block]

Note 6 – Marketable Securities

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of September 30, 2019 and December 31, 2018:

	September 30, 2019
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	5,612	$	11	$	(3	)	$	5,620
Corporate debt securities		16,503		100		(1	)		16,602
U.S. government agency securities		8,340		1		(10	)		8,331
Certificates of deposit/time deposits		1,479		22		(1	)		1,500
Commercial paper		1,491		-		(1	)		1,490
Total marketable securities	$	33,425	$	134	$	(16	)	$	33,543

	December 31, 2018
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	17,509	$	1	$	(33	)	$	17,477
Corporate debt securities		31,769		-		(96	)		31,673
U.S. government agency securities		16,843		-		(88	)		16,755
Certificates of deposit/time deposits		4,208		-		(25	)		4,183
Total marketable securities	$	70,329	$	1	$	(242	)	$	70,088

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. In reaching this conclusion, the Company considered the credit quality of the issuers of the debt securities as well as the Company’s intent to hold the investments to maturity and recover the full principal.

Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.

The September 30, 2019 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

	September 30,
(in thousands)	2019
Due in one year or less	$	23,642
Due after one year through five years		9,783
Total marketable securities	$	33,425

XML

Note 10 - Accumulated Other Comprehensive Loss

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Disclosure of Reclassification Amount [Text Block]

 Note 10 – Accumulated Other Comprehensive Loss

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2019			2018			2019			2018
Foreign currency translation adjustments
Balance at beginning of period	$	(8,494	)	$	(6,359	)	$	(8,492	)	$	(5,234	)
Other comprehensive income (loss) before reclassifications		(2,150	)		(879	)		(2,152	)		(2,004	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		(2,150	)		(879	)		(2,152	)		(2,004	)
Balance at end of period	$	(10,644	)	$	(7,238	)	$	(10,644	)	$	(7,238	)

XML

Note 8 - Leases - Balance Sheet Information (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Operating lease assets	$ 12,008	$ 0
Current operating lease liabilities	3,364	0
Long-term operating lease liabilities	9,006	$ 0
Total operating lease liabilities	$ 12,370

XML

Note 6 - Marketable Securities - Short-term and Long-term Marketable Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Amortized Cost	$ 33,425	$ 70,329
Unrealized Gains	134	1
Unrealized Losses	(16)	(242)
Fair Value	33,543	70,088
Bank Time Deposits [Member]
Amortized Cost	1,479	4,208
Unrealized Gains	22	0
Unrealized Losses	(1)	(25)
Fair Value	1,500	4,183
US States and Political Subdivisions Debt Securities [Member]
Amortized Cost	5,612	17,509
Unrealized Gains	11	1
Unrealized Losses	(3)	(33)
Fair Value	5,620	17,477
Corporate Debt Securities [Member]
Amortized Cost	16,503	31,769
Unrealized Gains	100	0
Unrealized Losses	(1)	(96)
Fair Value	16,602	31,673
US Government Agencies Debt Securities [Member]
Amortized Cost	8,340	16,843
Unrealized Gains	1	0
Unrealized Losses	(10)	(88)
Fair Value	8,331	$ 16,755
Commercial Paper, Not Included with Cash and Cash Equivalents [Member]
Amortized Cost	1,491
Unrealized Gains	0
Unrealized Losses	(1)
Fair Value	$ 1,490

XML

Note 4 - Goodwill and Other Intangible Assets (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Goodwill, Period Increase (Decrease), Total	$ 0		$ 0
Amortization of Intangible Assets, Total	$ 900	$ 800	$ 2,600	$ 2,400

XML

Note 10 - Accumulated Other Comprehensive Loss - Other Comprehensive Loss (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Balance	$ 558,113	$ 506,253	$ 541,497	$ 461,215
Balance	564,097	531,206	564,097	531,206
Accumulated Foreign Currency Adjustment Attributable to Parent [Member]
Balance	(8,494)	(6,359)	(8,492)	(5,234)
Other comprehensive income (loss) before reclassifications	(2,150)	(879)	(2,152)	(2,004)
Amounts reclassified from accumulated other comprehensive loss	0	0	0	0
Net current-period other comprehensive income (loss)	(2,150)	(879)	(2,152)	(2,004)
Balance	$ (10,644)	$ (7,238)	$ (10,644)	$ (7,238)

XML

Note 12 - Segment Reporting - Long-lived Assets by Geographic Region (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Long-lived assets	$ 252,579	$ 228,001
Operating Segments [Member] | United States Segment [Member]
Long-lived assets	203,771	185,979
Operating Segments [Member] | Europe Segment [Member]
Long-lived assets	40,353	34,577
Operating Segments [Member] | Japan Segment [Member]
Long-lived assets	$ 8,455	$ 7,445

XML

Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During the first quarter of 2019, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $13.1 million.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the impact to be material.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material.  

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statements of Operations:
Revenue	$ 117,455	$ 115,430	$ 346,839	$ 332,827
Cost of revenue	57,839	53,027	168,127	153,303
Gross profit	59,616	62,403	178,712	179,524
Operating expenses
Marketing and sales	17,604	16,818	55,466	50,947
Research and development	8,359	7,458	24,541	21,155
General and administrative	12,380	13,096	38,411	38,679
Total operating expenses	38,343	37,372	118,418	110,781
Income from operations	21,273	25,031	60,294	68,743
Other income, net	228	390	1,566	1,376
Income before income taxes	21,501	25,421	61,860	70,119
Provision for income taxes	4,709	4,484	13,391	12,817
Net income	$ 16,792	$ 20,937	$ 48,469	$ 57,302
Net income per share:
Basic (in dollars per share)	$ 0.63	$ 0.77	$ 1.80	$ 2.13
Diluted (in dollars per share)	$ 0.62	$ 0.77	$ 1.79	$ 2.10
Shares used to compute net income per share:
Basic (in shares)	26,846,030	27,038,585	26,894,420	26,963,205
Diluted (in shares)	27,005,341	27,337,886	27,072,873	27,268,311
Comprehensive Income (net of tax)
Comprehensive income	$ 14,642	$ 20,058	$ 46,317	$ 55,298

XML

Note 9 - Stock-based Compensation - Assumptions Used to Estimate the Fair Value of the ESPP (Details) - ESPP [Member]	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Expected life (Month)	6 months	6 months
Expected dividend yield	0.00%	0.00%
Minimum [Member]
Risk-free interest rate	2.33%	1.48%
Expected volatility	37.36%	24.49%
Maximum [Member]
Risk-free interest rate	2.35%	2.06%
Expected volatility	53.57%	31.50%

XML

Note 9 - Stock-based Compensation - Stock Option Activity (Details)	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Options outstanding (in shares) | shares	252,616
Options outstanding, weighted-average exercise price (in dollars per share) | $ / shares	$ 64.71
Granted (in shares) | shares	53,708
Granted, weighted-average exercise price (in dollars per share) | $ / shares	$ 105.81
Exercised (in shares) | shares	(11,921)
Exercised, weighted-average exercise price (in dollars per share) | $ / shares	$ 56.25
Forfeited (in shares) | shares	(10,833)
Forfeited, weighted-average exercise price (in dollars per share) | $ / shares	$ 83.74
Options outstanding (in shares) | shares	283,570
Options outstanding, weighted-average exercise price (in dollars per share) | $ / shares	$ 72.12
Options exercisable (in shares) | shares	154,539
Options exercisable, weighted-average exercise price (in dollars per share) | $ / shares	$ 58.18

XML

Note 8 - Leases - Maturities of Operating Lease Liabilities (Details) $ in Thousands	Sep. 30, 2019 USD ($)
2019 (excluding nine months ended September 30, 2019)	$ 1,216
2020	3,514
2021	2,770
2022	2,580
2023	1,041
After 2023	2,050
Total future minimum lease payments	13,171
Less interest	(801)
Present value of lease liabilities	$ 12,370

XML

Note 3 - Net Income Per Common Share (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2019		2018		2019		2018
Net income	$	16,792	$	20,937	$	48,469	$	57,302
Basic - weighted-average shares outstanding:		26,846,030		27,038,585		26,894,420		26,963,205
Effect of dilutive securities:
Employee stock options and other		159,311		299,301		178,453		305,106
Diluted - weighted-average shares outstanding:		27,005,341		27,337,886		27,072,873		27,268,311
Net income per share:
Basic	$	0.63	$	0.77	$	1.80	$	2.13
Diluted	$	0.62	$	0.77	$	1.79	$	2.10

XML

Note 7 - Inventory (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	September 30,			December 31,
(in thousands)	2019			2018
Raw materials	$	9,328		$	9,560
Work in process		304			792
Total inventory		9,632			10,352
Allowance for obsolescence		(184	)		(265	)
Inventory, net of allowance	$	9,448		$	10,087

XML

Note 12 - Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Income from Operations by Geographic Area [Table Text Block]

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Income from Operations:
United States	$	28,109		$	30,479		$	82,367		$	88,579
Europe		4,045			5,465			12,022			12,835
Corporate Unallocated and Japan		(10,881	)		(10,913	)		(34,095	)		(32,671	)
Total Income from Operations	$	21,273		$	25,031		$	60,294		$	68,743

Long-lived Assets by Geographic Areas [Table Text Block]

	September 30,		December 31,
(in thousands)	2019		2018
Total long-lived assets:
United States	$	203,771	$	185,979
Europe		40,353		34,577
Japan		8,455		7,445
Total Assets	$	252,579	$	228,001

Operating Segments [Member]

Notes Tables

Revenue from External Customers by Geographic Areas [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Revenue:
United States	$	92,916	$	90,732	$	271,877	$	261,253
Europe		20,721		21,273		62,915		61,431
Japan		3,818		3,425		12,047		10,143
Total revenue	$	117,455	$	115,430	$	346,839	$	332,827

XML

Note 9 - Stock-based Compensation (Details Textual) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-based Payment Arrangement, Expense	$ 3.2	$ 3.0	$ 9.7	$ 8.0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 47.84
Share-based Payment Arrangement, Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	4.2		$ 4.2
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition			2 years 9 months 18 days
Share-based Payment Arrangement, Option [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			4 years
Share-based Payment Arrangement, Option [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			5 years
ESPP [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Discount from Market Price, Offering Date			15.00%
Employee Stock Purchase Plan, Offering Period			6 months
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent			85.00%
Restricted Stock [Member]
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	24.4		$ 24.4
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition			2 years 9 months 18 days
Restricted Stock [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			4 years
Restricted Stock [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			5 years
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 2.7		$ 2.7
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition			1 year 10 months 24 days
Percentage of Target Number Capable of Being Earned and Vesting, Lower Limit	0.00%		0.00%
Percentage of Target Number Capable of Being Earned and Vesting, Upper Limit	150.00%		150.00%

XML

Note 8 - Leases - Lease Expense (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Operating lease cost	$ 967	$ 2,984
Variable lease cost	306	811
Total lease cost	$ 1,273	$ 3,795

XML

Note 9 - Stock-based Compensation - Performance Stock (Details) - Performance Shares [Member]	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Restricted stock (in shares) | shares	52,140
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 76.54
Granted (in shares) | shares	21,434
Granted, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 104.99
Restrictions lapsed (in shares) | shares	0
Restrictions lapsed, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 0
Performance change (in shares) | shares	(12,854)
Performance change, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 58.35
Forfeited (in shares) | shares	(2,375)
Forfeited, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 105.37
Restricted stock (in shares) | shares	58,345
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 89.82

XML

Note 2 - Recent Accounting Pronouncements (Details Textual) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Operating Lease, Right-of-Use Asset	$ 12,008		$ 0
Operating Lease, Liability, Total	$ 12,370
Accounting Standards Update 2016-02 [Member]
Operating Lease, Right-of-Use Asset		$ 13,100
Operating Lease, Liability, Total		$ 13,100

XML

Note 4 - Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	September 30, 2019							December 31, 2018							Useful	Weighted Average
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)	Useful Life Remaining (in years)
Intangible assets with finite lives:
Marketing assets	$	930	$	(504	)	$	426	$	930	$	(434	)	$	496	10.0	4.6
Non-compete agreement		270		(218	)		52		270		(206	)		64	2.0 - 5.0	3.3
Trade secrets		250		(250	)		-		250		(233	)		17	5.0	0.0
Trade names		1,080		(945	)		135		1,080		(540	)		540	2.0	0.3
Software technology		13,229		(1,933	)		11,296		12,229		(997	)		11,232	10.0	8.3
Customer relationships		10,070		(3,721	)		6,349		10,070		(2,569	)		7,501	6.0 - 9.0	4.1
Total intangible assets	$	25,829	$	(7,571	)	$	18,258	$	24,829	$	(4,979	)	$	19,850

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

(in thousands)	Estimated Amortization Expense
Remaining 2019	$	889
2020		3,016
2021		3,016
2022		3,016
2023		2,813
Thereafter		5,508
Total estimated amortization expense	$	18,258

XML

Note 8 - Leases (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Operating Lease Assets and Liabilities [Table Text Block]

(in thousands)	September 30, 2019
Operating lease assets	$	12,008
Current operating lease liabilities	$	3,364
Long-term operating lease liabilities		9,006
Total operating lease liabilities	$	12,370

Schedule of Lease Expense [Table Text Block]

(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	967	$	2,984
Variable lease cost		306		811
Total lease cost	$	1,273	$	3,795

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

(in thousands)	Operating Leases
Year Ending December 31,
2019 (excluding nine months ended September 30, 2019)	$	1,216
2020		3,514
2021		2,770
2022		2,580
2023		1,041
After 2023		2,050
Total future minimum lease payments		13,171
Less interest		(801	)
Present value of lease liabilities	$	12,370

Schedule of Lease Terms and Discount Rates [Table Text Block]

<table border="0" cellpadding="0" cellspacing="0" class="finTable" style="width: 85%; text-indent: 0px; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-right: 7.5%; margin-left: 7.5%;"> <tbody> <tr style="vertical-align: bottom; background-color: rgb(255, 255, 255);"> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="padding-bottom: 1px; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td colspan="2" style="text-align: center; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt; border-bottom-color: rgb(0, 0, 0); border-bottom-width: 1px; border-bottom-style: solid;"> <p style="margin: 0pt; text-align: center; font-family: "Times New Roman", Times, serif; font-size: 10pt;"><b><b><em style="font-weight: inherit; font-style: normal;">September 30, 2019</em></b></b></p> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt; border-bottom-color: rgb(0, 0, 0); border-bottom-width: 1px; border-bottom-style: solid;"> </td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204, 238, 255);"> <td style="width: 82%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> <p style="font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-top: 0pt; margin-bottom: 0pt;">Weighted Average Remaining Lease Term (Years)</p> </td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="width: 15%; text-align: right; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt;">4.8</td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt;"> </td> </tr> <tr style="vertical-align: bottom; background-color: rgb(255, 255, 255);"> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> <p style="font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-top: 0pt; margin-bottom: 0pt;">Weighted Average Discount Rate</p> </td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="width: 15%; text-align: right; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt;">2.6</td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt;">%</td> </tr> </tbody> </table>

Schedule of Lease Cash Flow Information [Table Text Block]

<table border="0" cellpadding="0" cellspacing="0" class="finTable" style="width: 90%; text-indent: 0px; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-right: 5%; margin-left: 5%;"> <tbody> <tr style="vertical-align: bottom; background-color: rgb(255, 255, 255);"> <td style="width: 83%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> <p style="font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-top: 0pt; margin-bottom: 0pt;">(in thousands)</p> </td> <td style="padding-bottom: 1px; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td colspan="2" style="text-align: center; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt; border-bottom-color: rgb(0, 0, 0); border-bottom-width: 1px; border-bottom-style: solid;"> <p style="margin: 0pt; text-align: center; font-family: "Times New Roman", Times, serif; font-size: 10pt;"><b><b><b>Nine Months Ended </b></b></b></p> <p style="margin: 0pt; text-align: center; font-family: "Times New Roman", Times, serif; font-size: 10pt;"><b><b><b>September 30, 2019</b></b></b></p> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt; border-bottom-color: rgb(0, 0, 0); border-bottom-width: 1px; border-bottom-style: solid;"> </td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204, 238, 255);"> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> <p style="font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-top: 0pt; margin-bottom: 0pt;">Cash paid for amounts included in the measurement of operating lease liabilities:</p> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> </tr> <tr style="vertical-align: bottom; background-color: rgb(255, 255, 255);"> <td style="padding-left: 9pt; font-family: "Times New Roman", Times, serif; font-size: 10pt;">Operating cash flows for operating leases</td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="width: 1%; padding-left: 0px; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0px;">$</td> <td style="width: 14%; text-align: right; padding-left: 0px; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0px;">3,878</td> <td style="width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt; margin-left: 0pt;"> </td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204, 238, 255);"> <td style="margin: 0px; padding: 0px; font-family: "Times New Roman", Times, serif; font-size: 10pt;">Lease assets obtained in exchange for new operating lease liabilities</td> <td style="margin: 0px; padding: 0px; width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="margin: 0px; padding: 0px; width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> <td style="margin: 0px; padding: 0px; width: 14%; text-align: right; font-family: "Times New Roman", Times, serif; font-size: 10pt;">1,837</td> <td style="margin: 0px; padding: 0px; width: 1%; font-family: "Times New Roman", Times, serif; font-size: 10pt;"> </td> </tr> </tbody> </table>

XML

Note 7 - Inventory

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Inventory Disclosure [Text Block]

Note 7 – Inventory

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

The Company’s inventory consisted of the following as of the dates indicated:

	September 30,			December 31,
(in thousands)	2019			2018
Raw materials	$	9,328		$	9,560
Work in process		304			792
Total inventory		9,632			10,352
Allowance for obsolescence		(184	)		(265	)
Inventory, net of allowance	$	9,448		$	10,087

XML

Note 11 - Income Taxes

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 11 – Income Taxes

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended September 30, 2019 and 2018, the Company recorded an income tax provision of $4.7 million and $4.5 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded an income tax provision of $13.4 million and $12.8 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended September 30, 2019 was 21.9 percent compared to 17.6 percent in the same period of the prior year. The effective tax rate increased by 4.3 percent for the three months ended September 30, 2019 when compared to the same period in 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018. The effective income tax rate for the nine months ended September 30, 2019 was 21.6 percent compared to 18.3 percent in the same period of the prior year. The effective tax rate increased by 3.3 percent for the nine months ended September 30, 2019 when compared to the same period in 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options and favorable results from a decrease in the uncertain tax position reserve in 2018.

The effective income tax rate for the nine months ended September 30, 2019 differs from the U.S. federal statutory rate of 21.0 percent due to various factors, including operating in multiple state and foreign jurisdictions and tax credits for which the Company qualifies.

The Company had unrecognized tax benefits totaling $4.4 million and $4.1 million as of September 30, 2019 and December 31, 2018, respectively, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

XML

Note 5 - Fair Value Measurements - Fair Value of Financial Assets Measured on a Recurring Basis (Details) - Fair Value, Recurring [Member] - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Inputs, Level 1 [Member]
Money market mutual fund	$ 58,563	$ 8,943
Total	58,563	8,943
Fair Value, Inputs, Level 2 [Member]
Money market mutual fund	0	0
Total	0	0
Fair Value, Inputs, Level 3 [Member]
Money market mutual fund	0	0
Total	$ 0	$ 0

XML

Note 3 - Net Income Per Common Share - Computation of Basic and Diluted Net Income Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Net income	$ 16,792	$ 16,166	$ 15,511	$ 20,937	$ 18,314	$ 18,051	$ 48,469	$ 57,302
Basic - weighted-average shares outstanding: (in shares)	26,846,030			27,038,585			26,894,420	26,963,205
Employee stock options and other (in shares)	159,311			299,301			178,453	305,106
Diluted - weighted-average shares outstanding: (in shares)	27,005,341			27,337,886			27,072,873	27,268,311
Basic (in dollars per share)	$ 0.63			$ 0.77			$ 1.80	$ 2.13
Diluted (in dollars per share)	$ 0.62			$ 0.77			$ 1.79	$ 2.10

XML

Note 8 - Leases (Details Textual) Pure in Thousands, $ in Thousands	Sep. 30, 2019 USD ($)	Jan. 01, 2019 USD ($)	Dec. 31, 2018 USD ($)
Operating Lease, Right-of-Use Asset	$ 12,008		$ 0
Operating Lease, Liability, Total	$ 12,370
Lessee, Financial Lease, Liability, Number of Leases	0
Lessee, Operating Lease, Lease Not yet Commenced, Number of Leases	0
Minimum [Member] | Office Space, Manufacturing Facilities, and Certain Company Vehicles and Equipment [Member]
Lessee, Operating Lease, Term of Contract	1 year
Maximum [Member] | Office Space, Manufacturing Facilities, and Certain Company Vehicles and Equipment [Member]
Lessee, Operating Lease, Term of Contract	10 years
Accounting Standards Update 2016-02 [Member]
Operating Lease, Right-of-Use Asset		$ 13,100
Operating Lease, Liability, Total		$ 13,100

XML

Note 11 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Income Tax Expense (Benefit), Total	$ 4,709	$ 4,484	$ 13,391	$ 12,817
Effective Income Tax Rate Reconciliation, Percent, Total	21.90%	17.60%	21.60%	18.30%
Effective Income Tax Rate, Increase (Decrease), Percentage	4.30%		3.30%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent			21.00%
Unrecognized Tax Benefits, Ending Balance	$ 4,400		$ 4,400		$ 4,100

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 24, 2019
Document Information [Line Items]
Entity Central Index Key	0001443669
Entity Registrant Name	Proto Labs Inc
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2019
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2019
Document Transition Report	false
Entity File Number	001-35435
Entity Incorporation, State or Country Code	MN
Entity Tax Identification Number	41-1939628
Entity Address, Address Line One	5540 Pioneer Creek Drive
Entity Address, City or Town	Maple Plain
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55359
City Area Code	763
Local Phone Number	479-3680
Title of 12(b) Security	Common Stock, Par Value $0.001 Per Share
Trading Symbol	PRLB
Security Exchange Name	NYSE
Entity Interactive Data Current	Yes
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		26,759,436

XML

Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance (in shares) at Dec. 31, 2017	26,828,651
Balance at Dec. 31, 2017	$ 27	$ 241,725	$ 224,697	$ (5,234)	$ 461,215
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	102,895
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		2,250			2,250
Stock-based compensation expense		2,307			2,307
Repurchases of common stock (in shares)	0
Net income			18,051		18,051
Other comprehensive income
Foreign currency translation adjustment				2,393	2,393
Comprehensive income					20,444
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	102,895
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		2,250			2,250
Stock-based compensation expense		2,307			2,307
Repurchases of common stock (in shares)	0
Net income			18,051		18,051
Balance (in shares) at Dec. 31, 2017	26,828,651
Balance at Dec. 31, 2017	$ 27	241,725	224,697	(5,234)	461,215
Balance (in shares) at Mar. 31, 2018	26,931,546
Balance at Mar. 31, 2018	$ 27	246,282	244,208	(2,841)	487,676
Balance (in shares) at Dec. 31, 2017	26,828,651
Balance at Dec. 31, 2017	$ 27	241,725	224,697	(5,234)	461,215
Net income					57,302
Other comprehensive income
Comprehensive income					55,298
Net income					57,302
Balance (in shares) at Dec. 31, 2017	26,828,651
Balance at Dec. 31, 2017	$ 27	241,725	224,697	(5,234)	461,215
Balance (in shares) at Sep. 30, 2018	27,068,068
Balance at Sep. 30, 2018	$ 27	254,958	283,459	(7,238)	531,206
Other comprehensive income
Revenue recognition transition adjustment			1,460		1,460
Balance (in shares) at Mar. 31, 2018	26,931,546
Balance at Mar. 31, 2018	$ 27	246,282	244,208	(2,841)	487,676
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	94,848
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		1,054			1,054
Stock-based compensation expense		2,727			2,727
Repurchases of common stock (in shares)	0
Net income			18,314		18,314
Other comprehensive income
Foreign currency translation adjustment				(3,518)	(3,518)
Comprehensive income					14,796
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	94,848
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		1,054			1,054
Stock-based compensation expense		2,727			2,727
Repurchases of common stock (in shares)	0
Net income			18,314		18,314
Balance (in shares) at Mar. 31, 2018	26,931,546
Balance at Mar. 31, 2018	$ 27	246,282	244,208	(2,841)	487,676
Balance (in shares) at Jun. 30, 2018	27,026,394
Balance at Jun. 30, 2018	$ 27	250,063	262,522	(6,359)	506,253
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	41,674
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		1,942			1,942
Stock-based compensation expense		2,953			2,953
Repurchases of common stock (in shares)	0
Net income			20,937		20,937
Other comprehensive income
Foreign currency translation adjustment				(879)	(879)
Comprehensive income					20,058
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	41,674
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		1,942			1,942
Stock-based compensation expense		2,953			2,953
Repurchases of common stock (in shares)	0
Net income			20,937		20,937
Balance (in shares) at Jun. 30, 2018	27,026,394
Balance at Jun. 30, 2018	$ 27	250,063	262,522	(6,359)	506,253
Balance (in shares) at Sep. 30, 2018	27,068,068
Balance at Sep. 30, 2018	$ 27	254,958	283,459	(7,238)	$ 531,206
Balance (in shares) at Dec. 31, 2018	26,984,747				26,984,747
Balance at Dec. 31, 2018	$ 27	258,502	291,460	(8,492)	$ 541,497
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	19,950
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		(420)			(420)
Stock-based compensation expense		3,040			3,040
Repurchases of common stock (in shares)	(157,716)
Repurchases of common stock		(1,511)	(15,798)		(17,309)
Net income			15,511		15,511
Other comprehensive income
Foreign currency translation adjustment				476	476
Comprehensive income					15,987
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	19,950
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		(420)			(420)
Stock-based compensation expense		3,040			3,040
Repurchases of common stock (in shares)	(157,716)
Repurchases of common stock		(1,511)	(15,798)		(17,309)
Net income			15,511		$ 15,511
Balance (in shares) at Dec. 31, 2018	26,984,747				26,984,747
Balance at Dec. 31, 2018	$ 27	258,502	291,460	(8,492)	$ 541,497
Balance (in shares) at Mar. 31, 2019	26,846,981
Balance at Mar. 31, 2019	$ 27	259,611	291,173	(8,016)	$ 542,795
Balance (in shares) at Dec. 31, 2018	26,984,747				26,984,747
Balance at Dec. 31, 2018	$ 27	258,502	291,460	(8,492)	$ 541,497
Net income					48,469
Other comprehensive income
Comprehensive income					46,317
Net income					$ 48,469
Balance (in shares) at Dec. 31, 2018	26,984,747				26,984,747
Balance at Dec. 31, 2018	$ 27	258,502	291,460	(8,492)	$ 541,497
Balance (in shares) at Sep. 30, 2019	26,759,109				26,759,109
Balance at Sep. 30, 2019	$ 27	265,178	309,536	(10,644)	$ 564,097
Balance (in shares) at Mar. 31, 2019	26,846,981
Balance at Mar. 31, 2019	$ 27	259,611	291,173	(8,016)	542,795
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	75,785
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		245			245
Stock-based compensation expense		3,486			3,486
Repurchases of common stock (in shares)	(40,669)
Repurchases of common stock		(390)	(3,711)		(4,101)
Net income			16,166		16,166
Other comprehensive income
Foreign currency translation adjustment				(478)	(478)
Comprehensive income					15,688
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	75,785
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		245			245
Stock-based compensation expense		3,486			3,486
Repurchases of common stock (in shares)	(40,669)
Repurchases of common stock		(390)	(3,711)		(4,101)
Net income			16,166		16,166
Balance (in shares) at Mar. 31, 2019	26,846,981
Balance at Mar. 31, 2019	$ 27	259,611	291,173	(8,016)	542,795
Balance (in shares) at Jun. 30, 2019	26,882,097
Balance at Jun. 30, 2019	$ 27	262,952	303,628	(8,494)	558,113
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	5,089
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		241			241
Stock-based compensation expense		3,212			3,212
Repurchases of common stock (in shares)	(128,077)
Repurchases of common stock		(1,227)	(10,884)		(12,111)
Net income			16,792		16,792
Other comprehensive income
Foreign currency translation adjustment				(2,150)	(2,150)
Comprehensive income					14,642
Common shares issued on exercise of options and other, net of shares withheld for tax obligations (in shares)	5,089
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		241			241
Stock-based compensation expense		3,212			3,212
Repurchases of common stock (in shares)	(128,077)
Repurchases of common stock		(1,227)	(10,884)		(12,111)
Net income			16,792		16,792
Balance (in shares) at Jun. 30, 2019	26,882,097
Balance at Jun. 30, 2019	$ 27	262,952	303,628	(8,494)	$ 558,113
Balance (in shares) at Sep. 30, 2019	26,759,109				26,759,109
Balance at Sep. 30, 2019	$ 27	$ 265,178	$ 309,536	$ (10,644)	$ 564,097

XML

Note 3 - Net Income Per Common Share

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Earnings Per Share [Text Block]

Note 3 – Net Income per Common Share

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

The table below sets forth the computation of basic and diluted net income per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2019		2018		2019		2018
Net income	$	16,792	$	20,937	$	48,469	$	57,302
Basic - weighted-average shares outstanding:		26,846,030		27,038,585		26,894,420		26,963,205
Effect of dilutive securities:
Employee stock options and other		159,311		299,301		178,453		305,106
Diluted - weighted-average shares outstanding:		27,005,341		27,337,886		27,072,873		27,268,311
Net income per share:
Basic	$	0.63	$	0.77	$	1.80	$	2.13
Diluted	$	0.62	$	0.77	$	1.79	$	2.10

XML

Note 9 - Stock-based Compensation - Assumptions Used in the Black-Scholes Option Pricing Model (Details) - Share-based Payment Arrangement, Option [Member]	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Expected life (Year)	6 years 3 months	6 years 3 months
Expected dividend yield	0.00%	0.00%
Minimum [Member]
Risk-free interest rate	2.35%	2.52%
Expected volatility	42.52%	41.68%
Maximum [Member]
Risk-free interest rate	2.58%	3.07%
Expected volatility	42.74%	42.22%

XML

Note 8 - Leases - Weighted Average Remaining Terms and Discount Rates (Details)	Sep. 30, 2019
Weighted Average Remaining Lease Term (Years) (Year)	4 years 9 months 18 days
Weighted Average Discount Rate	2.60%

XML

Note 6 - Marketable Securities (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Debt Securities, Held-to-maturity [Table Text Block]

	September 30, 2019
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	5,612	$	11	$	(3	)	$	5,620
Corporate debt securities		16,503		100		(1	)		16,602
U.S. government agency securities		8,340		1		(10	)		8,331
Certificates of deposit/time deposits		1,479		22		(1	)		1,500
Commercial paper		1,491		-		(1	)		1,490
Total marketable securities	$	33,425	$	134	$	(16	)	$	33,543

	December 31, 2018
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	17,509	$	1	$	(33	)	$	17,477
Corporate debt securities		31,769		-		(96	)		31,673
U.S. government agency securities		16,843		-		(88	)		16,755
Certificates of deposit/time deposits		4,208		-		(25	)		4,183
Total marketable securities	$	70,329	$	1	$	(242	)	$	70,088

Investments Classified by Contractual Maturity Date [Table Text Block]

	September 30,
(in thousands)	2019
Due in one year or less	$	23,642
Due after one year through five years		9,783
Total marketable securities	$	33,425

XML

Note 10 - Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Comprehensive Income (Loss) [Table Text Block]

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2019			2018			2019			2018
Foreign currency translation adjustments
Balance at beginning of period	$	(8,494	)	$	(6,359	)	$	(8,492	)	$	(5,234	)
Other comprehensive income (loss) before reclassifications		(2,150	)		(879	)		(2,152	)		(2,004	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		(2,150	)		(879	)		(2,152	)		(2,004	)
Balance at end of period	$	(10,644	)	$	(7,238	)	$	(10,644	)	$	(7,238	)

XML

Note 6 - Marketable Securities - Balance of Held-to-maturity Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Due in one year or less	$ 23,642
Due after one year through five years	9,783
Total marketable securities	$ 33,425	$ 70,329

XML

Note 4 - Goodwill and Other Intangible Assets - Intangible Assets Other Than Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Gross	$ 25,829	$ 24,829
Accumulated Amortization	(7,571)	(4,979)
Net	18,258	19,850
Marketing-Related Intangible Assets [Member]
Gross	930	930
Accumulated Amortization	(504)	(434)
Net	$ 426	496
Useful Life (Year)	10 years
Weighted average useful life remaining (Year)	4 years 7 months 6 days
Noncompete Agreements [Member]
Gross	$ 270	270
Accumulated Amortization	(218)	(206)
Net	$ 52	64
Weighted average useful life remaining (Year)	3 years 3 months 18 days
Noncompete Agreements [Member] | Minimum [Member]
Useful Life (Year)	2 years
Noncompete Agreements [Member] | Maximum [Member]
Useful Life (Year)	5 years
Trade Secrets [Member]
Gross	$ 250	250
Accumulated Amortization	(250)	(233)
Net	$ 0	17
Useful Life (Year)	5 years
Weighted average useful life remaining (Year)	0 years
Trade Names [Member]
Gross	$ 1,080	1,080
Accumulated Amortization	(945)	(540)
Net	$ 135	540
Useful Life (Year)	2 years
Weighted average useful life remaining (Year)	3 months 18 days
Computer Software, Intangible Asset [Member]
Gross	$ 13,229	12,229
Accumulated Amortization	(1,933)	(997)
Net	$ 11,296	11,232
Useful Life (Year)	10 years
Weighted average useful life remaining (Year)	8 years 3 months 18 days
Customer Relationships [Member]
Gross	$ 10,070	10,070
Accumulated Amortization	(3,721)	(2,569)
Net	$ 6,349	$ 7,501
Weighted average useful life remaining (Year)	4 years 1 month 6 days
Customer Relationships [Member] | Minimum [Member]
Useful Life (Year)	6 years
Customer Relationships [Member] | Maximum [Member]
Useful Life (Year)	9 years

XML

Note 5 - Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 5 – Fair Value Measurements

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs.

The following table summarizes financial assets as of September 30, 2019 and December 31, 2018 measured at fair value on a recurring basis: 

	September 30, 2019						December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	58,563	$	-	$	-	$	8,943	$	-	$	-
Total	$	58,563	$	-	$	-	$	8,943	$	-	$	-

XML

Note 9 - Stock-based Compensation

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

Note 9 – Stock-Based Compensation

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

Employee Stock Purchase Plan

The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period.

Stock-Based Compensation Expense

Stock-based compensation expense was $3.2 million and $3.0 million for the three months ended September 30, 2019 and 2018, respectively, and $9.7 million and $8.0 million for the nine months ended September 30, 2019 and 2018, respectively.

Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2019:

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2018		252,616		$	64.71
Granted		53,708			105.81
Exercised		(11,921	)		56.25
Forfeited		(10,833	)		83.74
Options outstanding at September 30, 2019		283,570		$	72.12
Exercisable at September 30, 2019		154,539		$	58.18

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period from four to five years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.

The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2019 was $47.84.

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2019 and 2018:

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.35 - 2.58%	2.52 - 3.07%
Expected life (years)	6.25	6.25
Expected volatility	42.52 - 42.74%	41.68 - 42.22%
Expected dividend yield	0%	0%

As of September 30, 2019, there was $4.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from four to five years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date. 

The following table summarizes restricted stock activity during the nine months ended September 30, 2019:

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2018		323,921		$	79.85
Granted		114,467			106.41
Restrictions lapsed		(95,884	)		79.32
Forfeited		(20,299	)		86.54
Restricted stock at September 30, 2019		322,205		$	89.02

As of September 30, 2019, there was $24.4 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.8 years. 

Performance Stock

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment.

The following table summarizes performance stock activity during the nine months ended September 30, 2019:

				Weighted-
				Average
				Grant Date
	Performance			Fair Value
	Stock			Per Share
Performance stock at December 31, 2018		52,140		$	76.54
Granted		21,434			104.99
Restrictions lapsed		-			-
Performance change		(12,854	)		58.35
Forfeited		(2,375	)		105.37
Performance stock at September 30, 2019		58,345		$	89.82

As of September 30, 2019, there was $2.7 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 1.9 years. 

Employee Stock Purchase Plan

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2019 and 2018: 

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.33 - 2.35%	1.48 - 2.06%
Expected life (months)	6.00	6.00
Expected volatility	37.36 - 53.57%	24.49 - 31.50%
Expected dividend yield	0%	0%

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

During the first quarter of 2019, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $13.1 million.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the impact to be material.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material.  

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Allowance for doubtful accounts	$ 1,001	$ 919
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	150,000,000	150,000,000
Common stock, shares issued (in shares)	26,759,109	26,984,747
Common stock, shares outstanding (in shares)	26,759,109	26,984,747

XML

Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1 – Basis of Presentation

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended  December 31, 2018 as filed with the Securities and Exchange Commission (SEC) on February 22, 2019.

The accompanying Consolidated Balance Sheet as of December 31, 2018 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K filed on February 22, 2019 as referenced above.

XML

Note 12 - Segment Reporting - Income From Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income from operations	$ 21,273	$ 25,031	$ 60,294	$ 68,743
Operating Segments [Member] | United States Segment [Member]
Income from operations	28,109	30,479	82,367	88,579
Operating Segments [Member] | Europe Segment [Member]
Income from operations	4,045	5,465	12,022	12,835
Operating Segments [Member] | Corporate Unallocated and Japan Segment[Member]
Income from operations	(10,881)	(10,913)	(34,095)	(32,671)
Corporate and Reconciling Items [Member]
Income from operations	$ 21,273	$ 25,031	$ 60,294	$ 68,743

XML

Note 7 - Inventory - Inventory (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Raw materials	$ 9,328	$ 9,560
Work in process	304	792
Total inventory	9,632	10,352
Allowance for obsolescence	(184)	(265)
Inventory, net of allowance	$ 9,448	$ 10,087

XML

Note 4 - Goodwill and Other Intangible Assets - Estimated Aggregated Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Remaining 2019	$ 889
2020	3,016
2021	3,016
2022	3,016
2023	2,813
Thereafter	5,508
Total estimated amortization expense	$ 18,258	$ 19,850

XML

Note 12 - Segment Reporting

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

Note 12 – Segment Reporting

The Company’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does not allocate directly to its operating segments.

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. 

Beginning in 2019, the Company's CODM made a decision to view certain research and development costs by geographic region. As a result, costs previously included in the Corporate Unallocated and Japan category have been included in the respective geographic regions.  All periods presented have been restated to reflect this change.

Revenue and income from operations by reportable segment for the three and nine months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Revenue:
United States	$	92,916	$	90,732	$	271,877	$	261,253
Europe		20,721		21,273		62,915		61,431
Japan		3,818		3,425		12,047		10,143
Total revenue	$	117,455	$	115,430	$	346,839	$	332,827

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Income from Operations:
United States	$	28,109		$	30,479		$	82,367		$	88,579
Europe		4,045			5,465			12,022			12,835
Corporate Unallocated and Japan		(10,881	)		(10,913	)		(34,095	)		(32,671	)
Total Income from Operations	$	21,273		$	25,031		$	60,294		$	68,743

Total long-lived assets at September 30, 2019 and December 31, 2018 were as follows:

	September 30,		December 31,
(in thousands)	2019		2018
Total long-lived assets:
United States	$	203,771	$	185,979
Europe		40,353		34,577
Japan		8,455		7,445
Total Assets	$	252,579	$	228,001

XML

Note 4 - Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

Note 4 – Goodwill and Other Intangible Assets

There were no changes in the carrying amount of Goodwill during the three and nine months ended September 30, 2019.

Intangible assets other than goodwill at  September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019							December 31, 2018							Useful	Weighted Average
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)	Useful Life Remaining (in years)
Intangible assets with finite lives:
Marketing assets	$	930	$	(504	)	$	426	$	930	$	(434	)	$	496	10.0	4.6
Non-compete agreement		270		(218	)		52		270		(206	)		64	2.0 - 5.0	3.3
Trade secrets		250		(250	)		-		250		(233	)		17	5.0	0.0
Trade names		1,080		(945	)		135		1,080		(540	)		540	2.0	0.3
Software technology		13,229		(1,933	)		11,296		12,229		(997	)		11,232	10.0	8.3
Customer relationships		10,070		(3,721	)		6,349		10,070		(2,569	)		7,501	6.0 - 9.0	4.1
Total intangible assets	$	25,829	$	(7,571	)	$	18,258	$	24,829	$	(4,979	)	$	19,850

Amortization expense for intangible assets was $0.9 million and $0.8 million for the three months ended  September 30, 2019 and 2018, respectively, and $2.6 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:

(in thousands)	Estimated Amortization Expense
Remaining 2019	$	889
2020		3,016
2021		3,016
2022		3,016
2023		2,813
Thereafter		5,508
Total estimated amortization expense	$	18,258

XML

Note 8 - Leases

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

Note 8 – Leases

The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to the Company’s accounting policies as a result of adopting ASC 842 are discussed below.

The Company accounts for leases in accordance with ASC 842. The Company adopted the standard as of  January 1, 2019, using the alternative transition method provided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date (the "effective date method"). Under the effective date method, comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments to reflect the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. The Company did not elect the hindsight practical expedient. The Company recorded a net increase of $13.1 million to its operating lease assets and liabilities on January 1, 2019. The adoption did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 did not have a material impact on the Company's consolidated statements of comprehensive income, shareholders' equity or cash flows as of the adoption date.

The Company has operating leases for office space, manufacturing facilities and certain company vehicles and equipment. The leases have remaining lease terms of one year to 10 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of September 30, 2019, the operating lease liability does not include any options to extend or terminate leases. The Company currently has no finance leases.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate of return, therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease agreements that contain non-lease components, with the exception of certain real estate leases, are accounted for as a single lease component.

Supplemental balance sheet information related to leases was as follows:

(in thousands)	September 30, 2019
Operating lease assets	$	12,008
Current operating lease liabilities	$	3,364
Long-term operating lease liabilities		9,006
Total operating lease liabilities	$	12,370

Lease expense is recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred. The components of lease expense for the periods reported were as follows:

(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	967	$	2,984
Variable lease cost		306		811
Total lease cost	$	1,273	$	3,795

Maturities of operating lease liabilities as of September 30, 2019 (in accordance with ASC 842) were as follows:

(in thousands)	Operating Leases
Year Ending December 31,
2019 (excluding nine months ended September 30, 2019)	$	1,216
2020		3,514
2021		2,770
2022		2,580
2023		1,041
After 2023		2,050
Total future minimum lease payments		13,171
Less interest		(801	)
Present value of lease liabilities	$	12,370

As of September 30, 2019, we have no operating leases that have not yet commenced.

Weighted average remaining lease term and discount rate was as follows: 

	September 30, 2019
Weighted Average Remaining Lease Term (Years)		4.8
Weighted Average Discount Rate		2.6	%

Supplemental cash flow information related to leases was as follows:

(in thousands)	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows for operating leases	$	3,878
Lease assets obtained in exchange for new operating lease liabilities		1,837

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets
Cash and cash equivalents	$ 121,568	$ 85,046
Short-term marketable securities	23,642	46,750
Accounts receivable, net of allowance for doubtful accounts of $1,001 and $919 as of September 30, 2019 and December 31, 2018, respectively	64,069	59,155
Inventory	9,448	10,087
Prepaid expenses and other current assets	8,038	8,567
Income taxes receivable	2,852	5,757
Total current assets	229,617	215,362
Property and equipment, net	252,579	228,001
Goodwill	128,752	128,752
Other intangible assets, net	18,258	19,850
Long-term marketable securities	9,783	23,579
Operating lease assets	12,008	0
Other long-term assets	3,902	3,441
Total assets	654,899	618,985
Current liabilities
Accounts payable	18,668	17,411
Accrued compensation	12,926	18,130
Accrued liabilities and other	13,133	16,702
Current operating lease liabilities	3,364	0
Income taxes payable	6,717	491
Total current liabilities	54,808	52,734
Long-term operating lease liabilities	9,006	0
Long-term deferred tax liabilities	21,750	20,162
Other long-term liabilities	5,238	4,592
Total liabilities	90,802	77,488
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2019 and December 31, 2018	0	0
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,759,109 and 26,984,747 shares as of September 30, 2019 and December 31, 2018, respectively	27	27
Additional paid-in capital	265,178	258,502
Retained earnings	309,536	291,460
Accumulated other comprehensive loss	(10,644)	(8,492)
Total shareholders' equity	564,097	541,497
Total liabilities and shareholders' equity	$ 654,899	$ 618,985

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Operating activities
Net income	$ 48,469	$ 57,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,658	19,520
Stock-based compensation expense	9,738	7,986
Deferred taxes	1,599	1,770
Gain on sale of businesses	0	(671)
Amortization of held-to-maturity securities	(5)	336
Other	(133)	160
Changes in operating assets and liabilities:
Accounts receivable	(5,387)	(8,993)
Inventories	551	324
Prepaid expenses and other	(162)	(2,058)
Income taxes	9,165	2,278
Accounts payable	1,479	980
Accrued liabilities and other	(4,193)	6,028
Net cash provided by operating activities	83,779	84,962
Investing activities
Purchases of property, equipment and other capital assets	(46,151)	(61,898)
Cash used for acquisitions, net of cash acquired	0	(90)
Proceeds from sale of business	0	284
Purchases of other assets and investments	(4,000)	(126)
Purchases of marketable securities	(17,443)	(41,384)
Proceeds from maturities of marketable securities	54,352	44,721
Net cash used in investing activities	(13,242)	(58,493)
Financing activities
Payments on debt	0	(5,000)
Proceeds from exercises of stock options	2,486	7,269
Purchases of shares withheld for tax obligations	(2,420)	(2,021)
Repurchases of common stock	(33,521)	0
Net cash (used in) provided by financing activities	(33,455)	248
Effect of exchange rate changes on cash and cash equivalents	(560)	(831)
Net increase in cash and cash equivalents	36,522	25,886
Cash and cash equivalents, beginning of period	85,046	36,707
Cash and cash equivalents, end of period	$ 121,568	$ 62,593

XML

Note 12 - Segment Reporting - Revenue From Operations by Reportable Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue	$ 117,455	$ 115,430	$ 346,839	$ 332,827
Operating Segments [Member]
Revenue	117,455	115,430	346,839	332,827
Operating Segments [Member] | United States Segment [Member]
Revenue	92,916	90,732	271,877	261,253
Operating Segments [Member] | Europe Segment [Member]
Revenue	20,721	21,273	62,915	61,431
Operating Segments [Member] | Japan Segment [Member]
Revenue	$ 3,818	$ 3,425	$ 12,047	$ 10,143

XML

Note 9 - Stock-based Compensation - Restricted Stock Options (Details) - Restricted Stock [Member]	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Restricted stock (in shares) | shares	323,921
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 79.85
Granted (in shares) | shares	114,467
Granted, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 106.41
Restrictions lapsed (in shares) | shares	(95,884)
Restrictions lapsed, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 79.32
Forfeited (in shares) | shares	(20,299)
Forfeited, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 86.54
Restricted stock (in shares) | shares	322,205
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 89.02

XML

Note 8 - Leases - Cash Flow Information (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Operating cash flows for operating leases	$ 3,878
Lease assets obtained in exchange for new operating lease liabilities	$ 1,837

XML

Note 5 - Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

	September 30, 2019						December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	58,563	$	-	$	-	$	8,943	$	-	$	-
Total	$	58,563	$	-	$	-	$	8,943	$	-	$	-

XML

Note 9 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Share-based Payment Arrangement, Option, Activity [Table Text Block]

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2018		252,616		$	64.71
Granted		53,708			105.81
Exercised		(11,921	)		56.25
Forfeited		(10,833	)		83.74
Options outstanding at September 30, 2019		283,570		$	72.12
Exercisable at September 30, 2019		154,539		$	58.18

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.35 - 2.58%	2.52 - 3.07%
Expected life (years)	6.25	6.25
Expected volatility	42.52 - 42.74%	41.68 - 42.22%
Expected dividend yield	0%	0%

Share-based Payment Arrangement, Restricted Stock and Restricted Stock Unit, Activity [Table Text Block]

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2018		323,921		$	79.85
Granted		114,467			106.41
Restrictions lapsed		(95,884	)		79.32
Forfeited		(20,299	)		86.54
Restricted stock at September 30, 2019		322,205		$	89.02

Schedule of Nonvested Performance-based Units Activity [Table Text Block]

				Weighted-
				Average
				Grant Date
	Performance			Fair Value
	Stock			Per Share
Performance stock at December 31, 2018		52,140		$	76.54
Granted		21,434			104.99
Restrictions lapsed		-			-
Performance change		(12,854	)		58.35
Forfeited		(2,375	)		105.37
Performance stock at September 30, 2019		58,345		$	89.82

Schedule of Share-based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions [Table Text Block]

	Nine Months Ended September 30,
	2019	2018
Risk-free interest rate	2.33 - 2.35%	1.48 - 2.06%
Expected life (months)	6.00	6.00
Expected volatility	37.36 - 53.57%	24.49 - 31.50%
Expected dividend yield	0%	0%